Managing the crisis of a bank or insurance company is not covered by ordinary bankruptcy law. Faced with the risk of contagion that could destabilise the entire financial system, the public authorities have put in place a specific administrative regime, focused on the prevention and controlled management of insolvencies. This system, which is part of a a broader legal framework for regulated companies in difficultyThe Financial Stability Directive (FSD) was significantly strengthened in the wake of the 2008 crisis. It has a clear objective: to enable the orderly resolution of financial institutions, by protecting depositors and limiting the use of public funds. Understanding the central role of the supervisory authorities is therefore essential for any manager in the sector.
The institutional framework for supervision and resolution
The management of a financial institution's or insurance company's difficulties is orchestrated by a number of authorities, whose powers are divided between the national and European levels. This architecture has been designed to guarantee ongoing supervision and a rapid, coordinated response capability.
The Autorité de contrôle prudentiel et de résolution (ACPR): powers and missions
In France, the ACPR is the watchdog of the banking and insurance sector. Backed by the Banque de France, it has a permanent supervisory role. Its prerogatives are extensive: it grants approvals, ensures the financial soundness of the entities it supervises and oversees the protection of their customers. When an institution's situation deteriorates, the ACPR has an arsenal of preventive and corrective measures at its disposal.
It can, for example, require the implementation of a recovery programme, prohibit or limit certain transactions, or even suspend directors. Its most significant power lies in its ability to trigger a resolution procedure. The aim of this administrative intervention is to manage the crisis in an orderly fashion, outside the framework of traditional legal proceedings, when the general interest and financial stability are at stake. The ACPR then acts as the national resolution authority for the majority of institutions.
The influence of the European Central Bank (ECB) and the Single Resolution Board (SRB)
Since the introduction of the Banking Union, the supervisory architecture has changed for the largest players. The European Central Bank (ECB) has become the direct supervisor of so-called "material" credit institutions (SIs), based on criteria such as the size of their balance sheet. For these entities, the ECB is responsible for prudential supervision, in close cooperation with the ACPR, which remains the national contact point.
In the event of a crisis in one of these large banking groups, the power of decision in terms of resolution no longer rests with the national authority, but with the Single Resolution Board (SRB). This European body is responsible for planning and implementing the resolution of the largest banks in the eurozone and cross-border groups. The aim of this centralisation is to ensure coherent and effective management of crises likely to have a systemic impact at European level. This dual-level architecture illustrates the decisive influence of european law in cross-border crisis management.
Preventive measures: recovery and resolution plans
Even before a crisis occurs, regulations require rigorous preparation. Financial institutions and supervisory authorities must anticipate deterioration scenarios and plan appropriate responses. These planning exercises are at the heart of the preventive aspect of the resolution framework.
Preventive recovery plans
Every credit institution or insurance company of a certain size must draw up and keep up to date a "preventive recovery plan". This internal document, which must be validated by the supervisory authority, is a kind of survival guide. It identifies the various options that the institution could activate by its own means to overcome a serious financial crisis and restore its long-term viability.
The plan sets out a range of measures, such as disposing of assets, raising fresh capital, restructuring certain activities or making changes to governance. It must be based on precise indicators which, once reached, trigger the application of the planned measures. The aim is to enable the company to react quickly and in a structured way, without waiting for the situation to become irremediable.
Preventive resolution plans and resolvability
At the same time, the resolution authorities (ACPR or CRU) draw up a "preventive resolution plan" for each institution. Unlike the recovery plan, this document is not intended to save the company, but to organise its orderly 'death' should it fail. The aim is to prepare the tools and strategies that would be deployed to manage the failure without causing panic on the markets or resorting to public money.
During this process, the authority assesses the entity's "resolvability". In other words, it analyses whether the institution can undergo a resolution procedure effectively and without systemic risk. If obstacles are identified (an overly complex legal structure, excessive overlap of critical activities, etc.), the authority may require the institution to take steps to remove them. This may go as far as imposing structural changes to ensure that resolution is technically possible.
Banking and insurance resolution instruments
When a crisis is confirmed and preventive measures are insufficient, the resolution authorities have a specific toolbox at their disposal to manage the situation. These instruments, which are largely harmonised at European level, enable rapid intervention tailored to the circumstances.
Four main tools are available to them:
- Disposal of businesses : This involves selling all or part of the failing business to a solvent buyer. This solution ensures the continuity of the activities being sold and preserves jobs and customer relations.
- The bridge bank: The authorities may transfer the 'healthy' assets and liabilities or critical functions of the failing institution to a new entity, a 'bridge institution', wholly controlled by the public authorities. This temporary structure enables essential services to be maintained pending a subsequent sale.
- Asset segregation (or "bad bank"): This tool consists of isolating the impaired ("toxic") assets of the failing institution by transferring them to a hive-off vehicle. The aim is to clean up the bank's balance sheet to facilitate its recovery or sale.
- Bail-in : This is the most emblematic instrument of the new regime. It aims to absorb losses and recapitalise the institution by getting its own shareholders and creditors to contribute.
Bail-in and MREL/TLAC
The principle of internal replenishment (bail-in) marks a break with the bank bailouts of the past (lease-out). The basic idea is to stop using taxpayers' money to absorb a bank's losses. Instead, losses are allocated to shareholders and then, if necessary, to certain creditors, according to a strict order of priority defined by law.
In practical terms, shares and other equity securities are the first to absorb losses, and can be cancelled or significantly diluted. If this is not enough, some of the bank's debts may be forcibly converted into capital or their value may be reduced. For this mechanism to be operational, banks are required to meet minimum capital and liability requirements eligible for internal bail-in, known by the acronyms MREL (Minimum Requirement for own funds and Eligible Liabilities) and TLAC (Total Loss-Absorbing Capacity) for the world's largest banks. These requirements, which help to prevent systemic risk on financial markets and payment systemsIn the event of a resolution, they are required to permanently hold a sufficient 'cushion' of financial instruments specifically designed to absorb losses.
Specific features of the insurance sector
Although the resolution framework also applies to insurance companies, it has been significantly adapted to take account of the specific features of their business model. Crises in the insurance sector are often slower to appear and the risks of immediate contagion are generally considered to be lower than in the banking sector.
The main difference is the absence of an internal bailout tool (bail-in) in the same way as for banks. The complexity of policyholders' rights made such a measure difficult to implement. The authorities are favouring other instruments, in particular the transfer of portfolios of insurance policies to one or more other bodies. In the event of default, the primary objective is to find a buyer for the policies in order to guarantee continuity of cover for policyholders. Insurance guarantee funds also play an essential role in protecting the rights of policyholders if no takeover solution is found.
Financing bank resolution
Even if the principle is to avoid public money, a resolution procedure may require liquidity to be carried out successfully. For example, to capitalise a bridge institution or to guarantee certain liabilities for the duration of the restructuring. To cover these needs, a dedicated financing system has been set up, funded by the banking sector itself.
This financing is based on resolution funds, pre-financed by regular contributions paid by the banks. The architecture is two-tiered. At national level, the Fonds de Garantie des Dépôts et de Résolution (FGDR) collects contributions for the French segment. At eurozone level, these contributions feed the Single Resolution Fund (SRF), which has a financial capacity of several tens of billions of euros.
The purpose of the URF is to finance the resolution of large banks supervised by the ECB. This pooling of resources provides a credible financial strike force to manage the crisis of a major banking group, without depending on the finances of a single Member State.
Withdrawal of authorisation: the ultimate consequence of administrative action
Withdrawal of authorisation by the ACPR (or the ECB on a proposal from the ACPR) is one of the most serious measures that can be taken by a supervisory authority. It is not a resolution tool as such, but rather the consequence of a situation deemed irremediably compromised or a sanction for serious breaches.
This administrative decision terminates the establishment's right to carry on its regulated activities. In practice, it automatically results in the dissolution of the company and its entry into compulsory liquidation. Withdrawal of authorisation often marks the end of the administrative phase and the start of the judicial phase. This is where how the authority's decision and the opening of collective proceedings under ordinary law fit togetheralthough the latter is governed by specific rules for the financial sector.
Resolution and recovery procedures are complex areas, at the crossroads of administrative law and insolvency law. For a legal advice on resolution and recovery procedures for financial institutions or to anticipate regulatory requirements, our firm is at your service.
Sources
- Directive 2014/59/EU of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms (known as "BRRD").
- Regulation (EU) No 806/2014 of 15 July 2014 establishing uniform rules and procedure for the resolution of credit institutions (known as the "MRU Regulation").
- Monetary and Financial Code, in particular articles L. 511-41-1 et seq (prevention and resolution measures) and L. 612-1 et seq (powers of the ACPR).
- Insurance Code, in particular articles L. 311-1 et seq (resolution regime for the insurance sector) and L. 323-1 et seq (safeguard measures).
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